Tag Archives: Jobs

Catch my interview on Constructech TV with Peggy Smedley, along with Bernie Markstein. We are talking about the Economics of Construction.

Bernie covers Trade and Tariffs and the cost affect of steel, lumber and aluminum tariffs on residential and nonresidential construction.

I talk about growth in construction spending, infrastructure markets that are leading the way, the capacity to absorb more work and the impact on labor and the rate of growth of labor versus real construction volume.

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In the 24 months from May 2016 to May 2018, Construction Volume went up 3.0%. Jobs went UP by 8%, 500,000 jobs. Spending in that 24 month span increased by just over 12%, but inflation for that period across all construction averaged 9%, hence real volume increased only 3%. That’s a $35 billion increase in volume, enough new work to support 175,000 to 210,000 new construction jobs.

JOLTS (Job Openings and Labor Turnover Survey) job openings went up from 2.4% to 3.0%, up 50,000 openings. Jobs growth exceeded volume growth by more than double and yet job openings went up!

Not only did jobs growth of near 8% far exceed that needed to support the growth in new work, but also, because jobs growth was so strong, it should have reduced job openings.

What’s wrong with this picture?

Pretty obvious the numbers just don’t add up. First, since construction spending is always later revised up, in recent years by 2%, let’s be generous and assume spending will get revised up by 2%, and let’s keep inflation the same. That would result in a 5% increase in volume or closer to $60 billion in volume. That would support 300,000 to 360,000 new jobs, a need still well below the actual growth in jobs of 500,000.

No matter how we look at it, even generously supposing spending will later increase by 2%, jobs have increased greater than volume of work.

Companies predict job openings based on positions they need to fill within 30 days. But, what if their judgement of positions they need to fill is determined based on what they anticipate from increases in revenue, without taking inflation into consideration. Since revenue also includes inflation, which adds nothing to business volume, that would overestimate the need for new jobs. We’ve seen this before, in the last expansion.

2003-2006 construction spending increased by 35%, the most rapid increase in spending in over 30 years. But construction inflation during that four year period totaled over 30%, the most for four consecutive years dating back to 1978-1981. After adjusting for inflation real volume in 2003-2006 was up by less than 5%. Considering how high spending was and how much it felt like growth, there was surprisingly little. That did not hold back jobs expansion.

Construction firms added 15% to jobs, or 1,000,000 jobs during this period, more than 3x the actual need. Job Openings in the JOLTS report increased 100%+, from 100,000 to over 200,000. Firms hired far more than needed and kept increasing the report of job openings, even though they had already hired far more than required. In 2006, housing starts dropped 15%, residential spending dropped 25%, but residential jobs still increased by 6%. From 2003 to 2006, spending on nonresidential buildings increased by 20%, all of it inflation. Volume remained stagnant these four years, however jobs increased by 10%.

Clearly the increases in jobs during this period correlate more with spending than real inflation adjusted volume growth. This four-year period registered the largest productivity decline in over 30 years because the rate of jobs growth was much faster than volume growth.

For 2018-2019-2020, construction spending is currently forecast to increase 6.7%, 3.0% and 4.2%. But after adjusting for inflation, real construction volume is predicted to increase only in 2018 by about 2%. For 2019-2020 volume declines or remains flat.

An argument could be made that JOLTS openings is dependent on firms outlook for growth in the near future. For that, let’s look at predicted volume growth in 2nd half 2018 and in 1st half 2019. It is predicted spending will increase 1.5% in the 2nd half vs 1st half 2018. But adjusted for inflation, volume will decline by 1%. Likewise, for the 1st half 2019, although spending will increase, inflation will outpace spending and real volume will decline 1%. There is nothing in past data or forecast that would support an increase in forecast job openings.

Could it be that some firms are anticipating job needs based on spending, not on volume? Could it be that these firms are not adjusting revenues for inflation to get volume before using the data to prepare a business plan? This is not entirely anecdotal. In several presentations I’ve given over the years I’ve asked the audience, How many of you plan your business needs on your revenue? In a show of hands at a presentation to NHAGC, a large portion of the audience raised their hand.

If your construction company revenues are up 6% in a year when inflation is 5%, then your net volume is up only 1%. Your company jobs growth required is only 1%.

You cannot ignore the impact of inflation when forecasting jobs need.

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Jobs report for June issued this morning. Construction Jobs are up slightly. But the real story is in the last year of growth. Jobs are up 282,000 since June 2017. All across the industry, pundits are screaming jobs shortage. But is there one?

The current spending growth has 2018 on a path to reach an increase of near 8% in spending. But that is not volume. Most of that is INFLATION and that ADDS NO VOLUME. Inflation in 2018 is predicted (already in the spending numbers) to come in about 5% to 6%. Volume is spending minus inflation. Volume in 2018 forecast 2%-3%. Jobs are up 4% since June 2017.

Jobs growth of 4% when net volume is increasing only 2%-3% shows jobs growth in excess of volume. In 2017, jobs increased 3.4% against spending growth of 4.5%. But ALL of the spending growth was inflation, so net volume was 0%. So jobs growth has outpaced volume growth for the last two years by 5%.

This plot sets the plot lines to zero starting at Jan 1, 2011 so the growth from the bottom of the recession can be visualized. We started Jan 2011 with an excess of jobs.

The plot below shows from Jan 2005 through Dec 2010, volume had dropped 15% more than jobs. So we started the recovery in 2011 with excess jobs compared to 2005.

When we look into the three major sectors, the numbers show shortages in residential and job excesses in nonresidential building and nonresidential infrastructure.

You can read much more detail on this in several other articles I’ve written. See this link Construction Jobs 3-8-18 for an article that includes all links to previous articles on the Jobs/Workload imbalance, has an explanation of how some residential jobs are counted in nonresidential and shows the volume/jobs plots for residential and nonresidential.

Residential construction jobs currently total 2,817,000. That’s 83% of the peak jobs year, 2006, which averaged 3,405,000 jobs. Volume of residential work, after adjusting spending for inflation, peaked in Q1 2006 at $780 billion. Volume in the 1st five months of 2018 averaged only $540 billion, only 69% of peak volume. Since the peak in 2006, residential jobs are at 83% of peak, but volume is only at 69% of peak. If we look only at growth since the bottom in Q1 2011, residential jobs have not kept up with volume growth. However, jobs have increase far more than volume compared to the previous peak.

Nonresidential building construction jobs currently total 3,388,000. That’s 99.7% of the peak jobs year, 2007, which averaged 3,397,000 jobs. Volume of nonresidential buildings work, after adjusting spending for inflation, peaked around Q42007-Q12008 at $530 billion. Volume in the 1st five months of 2018 averaged only $420 billion, only 79% of peak volume. Since the peak, non residential buildings jobs have returned to previous levels, but volume is only at 79% of peak. Nonresidential buildings jobs, whether we look at just from the 2011 bottom or we compare since the 2007-2008 peak have increased far more than volume.

The following link shows the jobs vs volume plots for residential and nonresidential.

The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from June 2012 through June 2018 construction has added 1.5 million jobs, the 2nd strongest jobs growth ever recorded. It is 2nd to 1994-1999, the strongest construction expansion on record. We are currently in the 2nd strongest expansion, about equal to 1994-1999, but substantially stronger than 2000-2005.

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Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.

Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.

Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.

Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.

Public construction spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years. Educational and Transportation will contribute equally and together account for more than half of the Public spending growth in 2018.

In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.

In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.

Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.

Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.

80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.

New Construction Starts are booming (need to look past the mo/mo and ytd)

Residential – 2 highest qtrs since 2006 in last 12 months

Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months

Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.

Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.

Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.

Healthcare construction starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. Spending will increase slowly.

Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.

In 2010, Warehouse new construction starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.

Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.

New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.

Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.

Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.

All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.

Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.

A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.

A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.

Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.

Steel tariff could inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That would hurt the budget.

An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.

Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.

For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.

For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%. In 2013 it reached a 12-year high of 8%.

If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.

Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.

Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.

Are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This is residential space built using labor classified as non-residential commercial.

BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity.”

So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 177,000 jobs in the 4 months Nov’17-Feb’18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.

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The period 2011-2017 shows both spending and jobs growth at or near record highs.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 185,000 jobs in the last 4 months. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Jobs increased by 27%, 15% in excess of volume growth.

Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.

Construction spending reached a new high in 2017 at $1,236 billion in current $. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.

After adjusting all spending to equivalent 2017$, we see that all years from 1997 through 2008 had greater volume than 2017. In 2005 volume reached a peak at $1,450 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.

Total All 2018 construction spending is projected to increase 8% to $1.330 trillion.

Spending measured in current 2018$ will reach an all-time high, however, measured in constant inflation adjusted dollars, will still come in 14% below the 2005 high. When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007.

Nonresidential Buildings new starts are up 60% in four years. 2018 starting backlog is the highest ever, up 15% from 2017. Spending for 2018 is projected to increase 9%. For 2018, Educational spending is projected to increase 14%, the strongest growth since 2007. Starting backlog increased 10%/year for the last three years. Manufacturing posted several very large project starts in 2017. Spending is projected to increase 12% in 2018.

Non-building Infrastructure 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Spending for 2018 is projected to increase 8% to an all-time high. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Spending is projected to increase 20-25%/year for the next two years.

Public construction is a subset of both Nonresidential Buildings and Non-building Infrastructure. Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 spending growth are Educational and Transportation with a combined total forecast 20% growth. Expect 2018 public spending to increase 6% to 8%, the best growth in 10 years.

Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. Total starts for the last 6 months are the highest since 2006, but new starts in 2018 are projected at only +7%. Residential spending in 2018 is projected to increase only 6% after five years of increases over 10%.

Only 60% of all Infrastructure spending is publicly funded. That public subset of work averages growth of less than $10 billion/year.

The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.

Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.

Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.

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There are numerous articles circulating in the industry regarding the difficult growth of construction jobs. Some compare the percent growth in jobs to the percent growth in construction spending, often citing that spending has increased far more than jobs.

Well yes, that’s true. BUT…

In the 5 years 2013-2017 jobs increased by 1.3mil or 23%. Spending increased by 45%. The industry, for 5 years, has been saying it is difficult to find skilled workers to fill jobs. And yet total construction jobs added in last 5 yrs = 1.3 million, near all-time high growth.

Only 3 times since 1970 have 5-year jobs totals increased by more than the most recent 5-year period 2013-2017. All of the top jobs growth occurred between 1994-2000.

Only 5 times has 3-year jobs growth exceeded the most recent 3-year period. The period 2004-2006, with the highest 3-year jobs growth, also represents 50-year peak construction volume, although closely rivaled for both jobs growth and peak volume from 1999-2001.

But, comparing jobs growth to spending growth is an invalid comparison. Jobs must be compared to volume. Spending is not volume.

Construction spending includes inflation. Inflation does not support jobs growth. If spending is increasing 6%/year and inflation increases 4%/year, then real construction volume is increasing only 2%/year. Balanced jobs growth would then increase 2%/year.

Spending is measured in current $, always current to the year, which includes inflation from year to year. Volume is reported in constant $, constant to the baseline year, which adjusts for inflation. Jobs should be compared to constant $ volume growth.

For the 5-year period 2013-2017, although spending increased 45%, inflation was near 4%/year for all 5 years. Real construction volume increased only 22%. Jobs, up 23%, just slightly exceeded volume growth during this period.

I’ve written a series of articles on jobs vs spending/volume, comparing growth back to 2001. Links to the entire series can be found at the bottom of this post. Several things seem apparent from the analysis, among them, potentially hiring to match spending growth and hiring lags spending growth.

A benefit of the series is that it shows, although jobs/volume growth is nearly even, severe jobs imbalances exist within sectors. Nonresidential and Non-building show excess jobs while residential shows a severe jobs deficit.

Nonresidential buildings has had the largest jobs growth in excess of volume growth. This raises the question, are jobs being added in response to spending growth, which is almost 4%/year higher than real volume growth.

Non-building Infrastructure recent growth is similar to Nonres Bldgs, but it started 2011 with a large deficit.

Residential comparisons uncover some hidden factors. In this Residential plot, spending increased by 100% since Jan 1 2011, but after inflation volume increased by only 57%. Jobs lag 20% behind at only 37%.

But, are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This then is residential space built using labor classified as non-residential commercial. BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity”

The series of articles explains much more detail including productivity (annual $ put-in-place), jobs/workload balance and hiring patterns.

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During the period including 2011 through 2017, we had record construction spending, up 50% in 5 years, moderate inflation reaching as high as 4.6% but averaging 3.8%, record construction volume growth (spending minus inflation), up 30% in 5 years and the the 2nd highest rate of jobs growth ever recorded.

Residential spending was up 90% in 5 years, but real residential volume up only 50%. Residential inflation, at 6%/year, was much higher than all construction. Jobs increased only 33%.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-1999 with the highest 5-year growth ever of 1,483,000 jobs. That same 93-99 period had the previous highest spending and volume growth. 2004-2008 would have reached those lofty highs but the residential recession started in 2006 and by 2008 spending had already dropped 50%, offsetting the highest years of nonresidential growth ever posted.

The point made here is the period 2011-2017 shows spending and jobs at or near record growth. Although 2017 slowed, there is no widespread slowdown in volume or jobs growth.

This 2011-2017 plot of Construction Jobs Growth vs Construction Volume Growth seems to show there is no jobs shortage. In fact it shows jobs are growing slightly faster than volume. But that just does not sit well with survey data from contractors complaining of jobs shortages. So how is that explained?

There have been cries from some quarters, including this blog, that the answer lies in declining productivity. There seems to be plenty of workers, but it now takes more workers to do the same job that took fewer in the past. As we will see, that is part of the answer, but doesn’t explain why some contractors need to fill vacant positions. To find data that might answer that question about a jobs shortage we must dig a little deeper.

The total jobs vs volume picture masks what is going on in the three major sectors, Residential, Nonresidential Buildings and Non-Building Infrastructure. A breakout of jobs and volume growth by sector helps identify the imbalances and helps explain construction worker shortages. It shows the residential sector at a jobs deficit.

7 years 2011-2017 – % Jobs growth vs % Volume growth

Totals All Construction Jobs +31%, Volume +30%

Nonres Bldgs Jobs +27%, Volume +19%

Nonbldg Hvy Engr Jobs +21%, Volume +12%

Residential Jobs +40%, Volume +54%

The totals show jobs and volume almost equal, data that supports the 2011-2017 totals plot above and what we would expect in a balanced market. But severe imbalances show up by sector. Both nonresidential sectors show jobs growth far outpaced volume growth. Residential stands out with a huge deficit, with jobs way below volume growth.

Just looking at 2017 growth shows the most recent imbalances.

2017 % jobs growth vs % volume growth

Totals All Construction Jobs +3.4% Volume -0.8%

Nonres Bldgs Jobs +3.3% Volume -1.6%

Nonbldg Hvy Engr Jobs +1.7% Volume -6.0%

Residential Jobs +3.5% Volume +4.2%

Census recently released initial construction spending for 2017, totaling $1.230 trillion, up only 3.8% from 2016. What is somewhat disconcerting is that 2017 construction spending initial reports growth of 3.8% do not even match the total inflation growth of 4.6% for 2017, indicating a -0.8% volume decline. However, as does always occur, I’m expecting upward revisions (estimated +2%) to 2017$ construction spending on 7-1-18. If we don’t get an upward revision, then 2017 will go down as the largest productivity decline since recession. Even if we do get +2% upward revision to 2017$ spending, 2017 volume would be revised up to +1.2% and jobs growth will still exceed volume growth.

Let’s look a little deeper at the data within the sectors. Each chart is set to zero at Jan 2011 so we can see the change from that point, the low point of the recession, until today. At the bottom of each chart is shown a Balance at start. That represents the cumulative surplus or deficit of jobs growth compared to volume growth for the previous 10 years prior to Jan 2011. If there are no changes in productivity, or no surplus or deficit to counteract, then jobs should grow at the same pace as volume.

There are slight differences between the data in the three sector charts and the total construction chart. The sector charts use annual avg data and the totals chart uses actual monthly data.

Nonresidential Buildings and Non-building Infrastructure, over seven years and the most recent three years, show jobs increasing far more rapidly than volume. Nonresidential Buildings started 2011 with a surplus of jobs after the recession, but Infrastructure started 2011 with a substantial deficit of jobs. Only in this last year did Infrastructure jobs reach long-term balance with work volume.

Nonresidential Buildings started 2011 with a 13% surplus of jobs and more than doubled it in the seven years following. I’ve suggested before it could be that a part of this surplus is due to companies hiring to meet revenue growth, and not inflation adjusted volume. Although nonresidential spending actually increased 43%, volume since 2010 has increased only 12%. Since 2010 there has been 30% nonresidential buildings inflation, which adds zero to volume growth and zero need for new jobs. A 43% increase in spending could lead companies to erroneously act to staff up to meet spending, or revenue, more than needed for the 12% volume increase.

This plot for residential work shows from 2011 to the end of 2017, we’ve experienced a 20% growth deficit in jobs. How many residential jobs does this 20% growth deficit represent? From Jan 2011 through Dec 2017, residential jobs increased from approximately 2,000,000 to 2,700,000. So the base on which the % growth increased over that time is calculated on 2,000,000. An additional 20% growth would be a maximum of 400,000 more jobs needed to offset the seven year deficit. But what about the imbalances that existed when we started the period?

During the residential recession from just 2005 through 2010, residential volume declined by 55%, but jobs were reduced by only 38%. For the entire period 2001-2010, total volume of work declined by 14% more than jobs were reduced. Some of the surplus jobs get absorbed into workforce productivity losses and some remain available to increase workload. It’s impossible to tell how much of that labor force would be available to absorb future work, so for purposes of this analysis an estimate of at least 5% seems not unreasonable. That would mean for 2011-2017, instead of a need for an additional 20% more jobs, the need could be reduced by 5% or 100,000 jobs.

This analysis shows a current deficit of 300,000 to 400,000 residential construction jobs. While it does also show nonresidential buildings jobs far exceed the workload and there are more than enough surplus jobs to offset the residential deficit, there would be several questions of how transferable jobs might be between sectors.

Are there highly technical specialty jobs in Nonresidential Buildings that would not be transferable to Residential?

What is the incidence of specialty workers engaging in work across sectors? i.e., job is counted in one sector but working in another sector.

What has been the impact of losing immigrants from the construction workforce?

Is the ratio of immigrant workers in Residential much higher than Nonresidential?

Is the pay more attractive in Nonresidential construction?

What, if any, percentage of the Residential workforce is not being counted? Day labor?

One thing is known for certain, high-rise multifamily residential buildings may often be built by a firm that is classified primarily as a nonresidential commercial builder. Therefore, some jobs that are counted as nonresidential are really residential jobs.

I think most of these would have a more negative impact on Residential jobs. However, there is some possibility that the overall deficit may not be quite as high as available data show (points 2 and 6). And there is always the possibility that we’ve crossed a threshold that has led to new gains in productivity, although to some extent, the stark differences between Residential and Nonresidential Buildings data might counter that proposition.

These two following report references both document that there is a large unaccounted for shadow workforce in construction. This workforce is probably mostly residential.

Unemployment and productivity includes only jobs counted in the official U.S. Census Bureau of Labor Statistics (BLS) jobs report. Both these reports document a large, unaccounted for shadow workforce in construction. By some accounts, 40% or more of the construction workforce in California and Texas are immigrant workers. Immigrants may comprise between 14% and 22% of the total construction workforce. It is not clear how many within that total may or may not be included in the U.S. Census BLS jobs report. However, the totals are significant enough that they would alter some of the results commonly reported.

The best way to see the implications that the available data do show is to look at productivity. The simplest presentation of productivity measures the total volume of work completed divided by the number of workers needed to put the volume of work in place, or $Put-in-Place per worker. In this case, $ spending is adjusted for inflation to get a measure of constant $ volume, and jobs are adjusted for hours worked.

As the Residential jobs deficit increases vs workload, this plot shows that $PIP is increasing. That makes sense. The workload continues to increase and the jobs growth is lagging, so the $PIP per worker goes up. For Nonresidential Buildings, the rate of hiring is exceeding the rate of new volume and therefore the $PIP is declining.

In boom times, residential construction adds between 150,000 and 170,000 jobs per year and has only twice since 1993 added 200,000 jobs per year. In the most recent several years expansion, residential has reached a high of 156,000 jobs in one year but has averaged 130,000 per year over 5 years. So it’s pretty unlikely that we are about to start adding residential construction jobs at a continuous rate of 200,000+ jobs per year.

If residential jobs growth were to increase by 50,000 jobs per year over and above current average growth, it would take 6 to 8 years to wipe out the jobs deficit in residential construction.

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The last time construction jobs and workload were balanced was 2005. From 2006 through early 2011, workload dropped 15% greater than the decline in jobs. In other words, compared to 2005, contractors started the post-recession period in 2011 with 15% less workload on hand compared to the number of workers kept on staff and that resulted in the period 2006-2011 posting the largest productivity decline ever recorded.

For a discussion on data plotted 2001 to 2011, see this post Jobs vs Construction Volume – Imbalances. In the 2001-2011 plot above, jobs and workload are set to zero baseline in Jan 2001. This shows all of 2001 through 2004 that jobs/workload was balanced. The gap between the red and the blue lines above is the variance from zero change in Jobs/Workload balance. By Jan 2011 there was a 15% workload deficit.

The 1st quarter of 2011 was a dramatic turning point. Both jobs and work volume began to increase. To visualize the variance since Jan 2011, the following plot resets jobs and workload to zero baseline in Jan 2011.

From Jan 2011 to Jun 2015, construction volume increased 24% in 4 1/2 years. Staffing output increased 19% in the same period. Contractors may still feel the effects from not being able to grow staff at that same pace as volume during that period. However, we did see the larger work volume increases make up 5% of the 15% workload deficit from the previous period 2006-2011, but it loses sight of the fact that after almost five years we had not recouped the entire lost work output from all the other 10% staff imbalance that still remained.

From Jul 2015 to Oct 2017, volume increased just over 1% but jobs output grew by almost 7%. During that two year period, new jobs created plus the change in hours worked by the entire workforce grew 6% more than workload. Jobs increased greater than construction volume increased. The plot shows most of that variance occurred in 2015.

Shifting the time periods slightly gives another impression of the data, overall not much different. In discussions about Construction skilled labor shortages, it’s important to understand, both construction spending and volume are at record growth levels and jobs, since recession, and in last 3 yrs, have matched volume growth.

Overall, in the seven-year post-recession period Jan 2011 to Oct 2017, volume increased 25% and jobs output increased 26%. There seems very little room to be calling this a jobs shortage. Of course, this does not address skills.

So here we are most of the way through 2017 and if we look back at the last 11 years, not only are jobs once again increasing faster than workload, but also in total since 2005 we still have 14% staff that would need to be absorbed by new workload to return to the previous jobs/workload productivity balance.

Maybe it’s time we stop calling this a jobs shortage and start referring to it as a productivity challenge that needs to be turned around.

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From January 2001 to June 2017, jobs growth exceeded construction volume growth by 13%. The attached plots show the imbalances in growth.

Jobs growth is # of jobs x hours worked.

Volume is construction spending adjusted for inflation, or constant $.

Sometimes rapid spending growth is accompanied by higher than average inflation. This occurred in the 1990’s and again in 2005-2006. While spending seems to indicate rapid growth, much of the growth in cost is inflation and volume growth can be significantly lower, even sometimes negative, as occurred in 2005-2006. However, jobs growth during these rapid spending growth periods appears to track much more in line with spending growth. This leads to over-hiring and a loss of productivity occurs.

There are two distinct periods when jobs growth advanced more rapidly than real construction volume, 2005-2006 and mid-2015 to mid-2017. In the eight year period in between, either jobs fell faster or, after January 2011, volume increased faster. If spending growth is used to compare, then jobs growth falls far short of construction spending. But, due to inflation, spending is not the correct parameter to compare to jobs. Jobs must be compared to volume. Since 2001, the imbalance shows jobs growth has exceeded volume growth.

2001 through mid-year 2017, jobs exceeded volume growth by 13%.

2001-2004 jobs and volume growth were nearly equal.

2005-2006 jobs growth exceeded volume growth by 20%. During this period, construction spending and volume reached a peak. From late 2004 into early 2006, we experienced 20% growth in spending, the most rapid growth period on record. But that was also the period of the most rapid inflation growth on record. Residential volume peaked in early 2006 but then dropped 20% by the end of 2006. Nonresidential spending was increasing, but almost all of the growth was inflation. Nonresidential volume remained flat through 2006. Inflation was greater than spending growth, so volume declined. Although volume declined, hiring continued and jobs increased by 15%.

2007-2010 volume exceeded jobs growth by 4%. Spending decreased by 30%. Both volume and jobs were in steep decline. More jobs declined than volume, however, this period started with nearly 20% excess jobs. For January 2010 to January 2011, jobs bounced around near bottom, but volume dropped 8% more. 2010 ended with an excess of 15% jobs. January 2011 was the low-point for jobs.

2011-June 2015 volume exceeded jobs growth by 10%. Spending increased by almost 40% and inflation was relatively low at only 3%/yr. This period helped absorb more than half of the excess jobs that were created in 2005-2006 and remained after 2010. By mid-2015, jobs exceeded volume by only 7%.

June 2015-June 2017 jobs growth exceeded volume by 7%. Spending increased by 7%, but inflation was 7% over the same period. Although volume was up and down, over this two-year period through June 2017 we posted zero growth in volume. All of the increase in spending was inflation. Jobs increased 7% in two years.

For the last 5 years, 2012-2016, jobs averaged 4.5%/yr. growth Construction spending averaged 8.5%/yr. growth. Inflation, currently hovering around 4.5%, averaged about 3.5%/yr. during this period. So real volume growth was only 4% to 5%. In the first few years of the recovery, 2011-2014, the gap narrowed and volume improved over jobs, but for the last two years, jobs have been increasing faster than volume.

I do expect spending to continue at a 6% to 7% growth rate at least through 2018. But also, I expect inflation at 4% to 4.5%. If the spending forecast holds, and if jobs growth comes into balance, then that would indicate only a 2% to 3% jobs growth rate from now through 2018.